One of the more controversial elements of the Pension Schemes Act is the scale requirement, which seeks to consolidate defined contribution (DC) providers into institutions with a minimum of £25bn in assets.
While several master trusts have hit this level already, others are scrambling to do so. For some, the £25bn target is seen as too blunt an instrument.
In a discussion paper released last week, the government set out its proposed definitions of key terms such as the “main scale default arrangement” – this is the element that must hit £25bn – and what it will consider a “common investment strategy”.
In his foreword to the discussion paper, pensions minister Torsten Bell said: “It is in the interest of members that those running schemes have at least one large default arrangement that provides the buying power and expertise needed to deliver the benefits of scale…
“Work is now underway to draft the detailed regulations for scale, and this discussion paper seeks input on the key elements of how scale will be assessed.”
A full consultation on the scale rulebook will be published next year.
“The detail around the scale test and the mega-funds it will facilitate is particularly welcome. This reform could unlock tens of billions in investment, support jobs, and most importantly deliver better retirements for UK savers.”
Question marks remain about definitions
Mark Searle, partner and head of DC investment at XPS Group, said the proposed definitions in the consultation were “too narrow”, and risked dismissing providers with other benefits of scale such as “investment architecture, governance, partnerships and buying power across arrangements”.
“With only a small number of major commercial providers, policymakers should engage directly to build a holistic view of scale, including net-of-fee returns for members,” Searle said.
However, Mark Jaffray, a partner and senior DC investment consultant at Hymans Robertson, argued that the government’s approach “appears sensible” as “many of the benefits of scale are achieved at the investment strategy level”.
“As the policy develops, there are some areas where further consideration may be beneficial,” Jaffray added. “For example, policymakers may wish to consider whether a member’s expected retirement date, rather than age alone, could provide a more accurate basis for investment decisions.
“Equally, as guided retirement solutions become more common, there may be merit in retaining some flexibility within default arrangements to reflect the different ways members may choose to access their pension savings in retirement.”
Others were also positive about clarifications added to the scale tests and policy plans. Lou Davey, head of policy and external affairs at Independent Governance Group, highlighted additional details around transition periods for DC schemes that do not meet the new scale requirements, which she said would help “mitigate the risk of employers inadvertently breaching their automatic enrolment duties”.
Emma Furlonger, interim workplace managing director at Standard Life added that the scale and consolidation reforms “could unlock tens of billions in investment, support jobs, and most importantly deliver better retirements for UK savers”.
“As consolidation across the DC market accelerates, the focus must now be on ensuring that scale translates into better value for money and improved outcomes for members… Scale can only deliver its full potential if providers have scalable, member-centric technology that supports strong data governance, digital-first engagement and flexible scheme design.”
